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Go low again

2018 in the European gas market started with a very mild January that did its best to take the steam out of gas prices. TTF M+1 prices dropped by almost 6% over the month, dropping below 18 €/MWh. A cold start to February has reversed some of that fall. A number of supply outages have led to higher weekly storage withdrawals and stopped March prices from falling any further.

The main talking point of the last few weeks has centred on the 3.4 magnitude earthquake in the Netherlands that pushed Groningen gas production back into the Dutch political spotlight. More than that, it led to the relatively abrupt closure of the Loppersum clusters, which in the gas year 2016-17 were responsible for 0.87 bcm of gas production. While that was the immediate response, the bigger question is how low the future Groningen caps will go, with the Dutch regulator suggesting the Groningen production should go down to 12 bcm as soon as possible.

A 12 bcm cap for production would mean that all producing clusters outside of Oost would need to be closed, as well as at least one field group inside Oost. The Bierum field in Oost is already flagged for closure given its proximity to Loppersum and its cessation would do much of the work in meeting a 12 bcm cap. So, given this, the 12 bcm cap could be physically met through an aggressive pattern of cluster shut-ins.

The second barrier to surmount is whether there is sufficient H-gas to L-gas nitrogen conversion capacity to allow the Netherlands to lose some 12 bcm of L-gas Groningen production and make up for it with H-gas imports. We calculate that using just the unrestricted firm capacity would allow nitrogen conversion of an additional 13.6 bcm of L-gas on 2017 numbers if maximum firm capacity was used every day, although the bulk of that is in the summer.

To balance the L-gas market though, a 12 bcm annual cap that led to a winter Groningen gas supply cut of 6 bcm (in a normal year) would need to be balanced by recourse to 4 bcm of added nitrogen conversion in the winter months (all the remaining spare) and a further 2 bcm would need to be met from gas converted and injected into L-gas storage over the preceding summer. Regulatory approval of the expansion of Norg looks much more important if a draconian cut to Groningen output is agreed, given there is little L-gas storage outside of Norg connected to the Dutch system. This is a political decision, so expect a 2018-19 cap of anywhere between 12 and 20 bcm.

A cold start to February is still expected to transition to slightly above normal in temperature. We are expecting a monthly storage draw in the EU of around 16 bcm, and that will put end-of-February storage around 32 bcm, still some 2.5 bcm higher y/y. We expect March to see a 6 bcm draw on a return to normal weather, some 3.0 bcm higher than last year, and that would take the end-March storage level to 26 bcm—largely flat y/y.

High y/y stocks are no longer so bearish for prices, but power sector gas demand is adding downward pressure as nuclear outages ease and hydro levels rise. Relative fuel prices have also become a more bearish driver, with the front end of the Cif ARA coal curve dropping below 80 $/t in early February—more than 10% lower than end-January. Weaker coal prices have pushed fuel switch triggers down and TTF prompt and Mar-18 prices now look to be largely bound by the 16.5-18.4 €/MWh range currently set by the switch triggers. Weather forecasts will determine if prices tend to the top or bottom of that range, with any extension of the current cold to later in February meaning prices could trade near the top of the range until the weather changes.